1. Economic Analysis of Rural Roads
8. In conducting an economic analysis of roads, the following steps were taken:
a. Assessment of Road Condition, Existing Traffic, and Traffic Growth
9. Road roughness is measured by the international roughness index in meters per kilometer (m/km). For economic analysis, the difference between earth and paved roads in their existing condition has been taken into account. For bitumen-surfaced roads, the international roughness index (IRI) is 10 m/km; on herringbone bond roads, the IRI is 14 m/km; and for earthen roads, 18 m/km. These IRI values were assumed under the “without project” condition
over the project period. For “with Project” roads, an average lifetime IRI pf 4 m/km is assumed. Average annual daily traffic was calculated considering the number of market and non-market days in a year and adjusted for seasonal changes. Traffic growth is assumed to be 6.50% a year, somewhat less than the national traffic growth rate of 7.34% per year.1 The existing traffic is assumed to represent traffic volume without the Project. Traffic volume with the Project was set as equivalent to the existing traffic plus generated traffic, the latter being assumed to be 50% of traffic volume without project. This level of generated traffic is considered to be conservative since additional traffic volume in recently completed projects similar to the Project has ranged from about 70% to over 100%.2
b. Estimation of Costs
10. The economic costs of rural roads under the Project include the cost of upgrading existing, generally earthen roads to bitumen-paved condition in line with LGED standards. The investment cost, annual routine cost of maintenance, and the cost of periodic maintenance carried out every 5 years were included in the costs estimates. Physical contingencies, but not price escalation, were included in the economic costs. The financial costs were converted to economic costs by first deducting taxes and duties, adding physical contingency and management costs, and then applying the standard conversion factor of 0.80.
c. Estimation of Benefits
11. The major source of benefits from improving rural roads is savings in vehicle operating costs (VOC) over the smoother road surface for vehicles of all types. The incremental benefit increases at the rate corresponding to the traffic growth rate of 6.5 percent. The normal benefit (i.e., the benefit accruing from the existing traffic due to VOC reduction) is estimated to be 40% of the total benefits in the third year, 70% in the fourth year, and full from the fifth year. Additional benefits that will be realized but not quantified in the present analyses are increased agricultural income arising from higher fertilizer use due to its lower delivered price, greater use of high-yielding crop varieties, and higher market prices for agricultural produce.
d. Economic Internal Rate of Return (EIRR)
12. The economic analysis takes account of the different times at which project costs are incurred and benefits accrue. For any given subproject, the costs are mainly incurred during the first 2–5 years, while benefits start to flow in the third year, as indicated above, and achieve their full level by the fifth year of the Project. The period of analyses is set at 20 years. The economic costs are compared with the economic benefits, and the net benefits are used to calculate the EIRR.
2. Results of Economic Analysis of Roads
13. The economic analysis of three core subdistrict roads was performed using the procedures discussed above. EIRR analysis found all three roads to be economically viable. The Churkhi–Dapunia road will generate the highest benefit, followed by the Tarakanda– Shyamgonj road. The Mominpur–Keranirhat road will generate the least benefit among the three sample subdistrict roads but will still generate a rate of return of more than 12%. The results of alternative scenarios showed the changes in EIRR to be minimal.
1 Roads and Highways Department, Government of Bangladesh. 2003. Annual Report for 2002-2003. Dhaka. 2 LGED. 2004. Final Report on Benefit Monitoring and Evaluation, Rural Development Project-21. Dhaka.
Table A10.1: Results of Economic Analysis of Core Subdistrict Roads
(EIRR in %)
Name of the Road
Parameters Momoinpur– Keranirhat Churkhi– Dapunia Tarakanda– Shyamgonj A. Base Case 26.79 60.43 59.27 B. Sensitivity Cases
1. Maintenance cost is doubled 25.43 59.90 58.69
2. Delayed maintenance by 2 years 27.32 60.75 59.61
3. No maintenance with IRI increased from 4 to
10 m/km 23.64 51.96 46.56
4. Only half of traffic growth is realized 24.67 59.21 53.70
EIRR = economic internal rate of return, IRI = international roughness index, m/km = meters per kilometer.
Source: Asian Development Bank estimates.
3. Economic Analysis of Growth Center Markets
a. Introduction
14. Growth center markets (GCMs) are the focal points for the sale of rural produce, agricultural inputs, and consumer goods. In addition to GCMs there are also other small rural markets. Unimproved markets are congested, unhygienic, dusty in the dry season, and muddy in the wet season. Improved markets provide clean, uncongested, and efficient places for trading farm and other products. In the present Project, three types of markets will be developed: (i) GCMs located at subdistrict headquarters, (ii) GCMs not located at subdistrict headquarters, and (iii) small rural markets not designated as GCMs. Due to population growth and the increased trading of farm and other goods in the rural areas, demand for the third category of local markets has increased.
b. Methodology of Economic Analysis
15. Economic analysis of GCMs was as followed:
i. Estimating the Costs
16. The economic costs of GCMs under the Project include the cost of construction, including of women’s market section. Along with the investment cost, operation and maintenance costs were included in the estimates. Physical contingencies, but not price escalation, were included in the economic costs. The financial costs were converted to economic costs by first deducting taxes and duties, adding physical contingency and management costs, and then applying the standard conversion factor of 0.80.
ii. Estimation of Benefits
17. A spoilage savings approach was used to quantify benefits. Spoilage savings are the portion of revenue lost to the seller as a result of product quality deterioration. The benefit is the difference in spoilage savings of perishable goods in the market with and without the Project and calculated on the basis of number of peak and off-peak days in a year. It is assumed that
spoilage will reduce by 60% with the Project.3 The remaining 40% of the benefits will accrue from population growth and improved transport facilities. Benefits are expected to be generated from the second year of the improvement on the markets, with benefits increasing at a compounded rate of 8% per year.
c. Results of Economic Analysis
18. The results of the economic analysis of the core subproject GCM, GCMs located at subdistrict headquarters, and GCMs located outside of subdistrict headquarters are discussed below.
i. The Core Subproject Growth Center Market
19. One GCM—Mominpur, located at Rangpur Sadar—was selected to illustrate the procedure for economic analysis. A market survey was conducted at this site, annual spoilage savings calculated, and benefits estimated, yielding an EIRR of 17.87%. This is quite satisfactory and justifies investments in this component of the Project. Sensitivity analysis showed that, if maintenance cost was doubled, the EIRR decreased to 12.57%. If averted spoilage was reduced to 45% from the assumed 60%, the EIRR fell to 12.08.
Table A10.2: Results of Economic Analysis of 10 GCMs Located at Subdistrict Headquarters
District Subdistrict Name of the Market EIRR
Dinajpur Nawabgonj 1. Nawabgonjhat 34.55
Panchagarh Atwari 2. Fakirgonj hat 22.16
Rangpur Gongachara 3. Gongachara hat 86.17
Kurigram Bhurungamari 4. Bhurungamari hat 15.49
Kurigram Fulbari 5. Fulbari hat 74.45
Tangail Basail 6. Basail hat 57.29
Tangail Nagarpur 7. Nagurpur hat 24.30
Netrokona Purbodhala 8. Purbodhala hat 49.25
Munshiganj Sirajdikhan 9. Sirajdikhan hat 88.70
B. Baria Nasirnagar 10. Nasirnagar 32.21
EIRR = economic internal rate of return, GCM = growth center market. Source: Asian Development Bank estimates.
ii. Growth Center Markets Located at Subdistrict Headquarters
20. Under the Project, 30 GCMs located at subdistrict headquarters will be improved. Economic analyses for 10 were available for the feasibility study report conducted by the LGED. The findings are summarized in Table A10.2, showing that the EIRR of each of the 10 markets is well above 12%, ranging from 15.49% to, for four of them, over 50.00%. These high rates of return justify investments in GCMs.
d. Project Benefit Distribution
21. A benefits distribution analysis was carried out to determine what portions of the benefits accrue to each group of beneficiaries, particularly to the poor. The beneficiaries of the Project
are owners and users of the vehicles plying on the rural roads. The owners and users are further classified as either poor or not. The poverty impact ratio (PIR) was calculated to measure the proportion of the benefits from subdistrict roads, rural roads, and rural markets that would accrue to the poor (the detailed procedures are in Supplementary Appendix K). The results are shown below:
Table A10.3: Poverty Impact Ratio
Sources of Benefits PIR (%)
Subdistrict Roads 50.4
Union Roads 43.8
Rural Markets 30.1
PIR = poverty impact ratio.
Source: Asian Development Bank estimates.
22. The results show that the poor will benefit most from the subdistrict roads. Although the benefits to the poor from union roads and rural markets are lower, they are still substantial.
e. Project Sustainability
23. To ensure the sustainability of the facilities constructed, the Project will (i) continue to enhance the capability of local government units to better manage rural infrastructure in their jurisdiction; (ii) monitor the allocations to LGED for road maintenance from the central Government so that the maintenances gap will ultimately narrow; (iii) pursue labor-intensive, cost-effective maintenance procedures in LGED to ensure the sustainability of rural roads; (iv) ensure the participation of local government units in the maintenance of union complexes, thus strengthening their sense of ownership of the project; and (v) reorganize market management committees with a view to ensuring the efficient maintenance of rural market facilities with funds from market leases.